A report from Politico. "The U.S. housing finance system is worse off today than it was on the cusp of the 2008 financial crisis, Republican lawmakers and Trump administration officials warned on Tuesday. Fannie Mae and Freddie Mac, the two government-controlled enterprises that stand behind half the country's mortgages, are way too undercapitalized, and lending standards have actually deteriorated since the housing crash, the officials said."

"'This whole thing is a car wreck. It’s a dumpster fire, Sen. John Kennedy (R-La.) said at a Senate Banking Committee hearing on the White House’s proposal to overhaul the way the nation finances mortgages. 'We spent $190 billion of taxpayer money, and we’re in worse shape,' he said, referring to the bailout of Fannie Mae and Freddie Mac, which were seized by Treasury a decade ago to stave off catastrophic losses in the crisis."

"Right now, the companies are only allowed to retain a combined $6 billion in capital despite owning or guaranteeing $5.5 trillion of mortgages. 'I will tell you as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night,' Federal Housing Finance Agency Director Mark Calabria, the companies’ regulator, told the committee. 'If we do nothing, this is going to end very badly.'"

"What’s more, Fannie and Freddie are less equipped for a downturn now than they were before the crisis, Senate Banking Chairman Mike Crapo (R-Idaho) said. Before 2008, he said, the companies held 45 cents in capital for every $100 in mortgages; today that figure is 19 cents."

"Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson and Calabria all agreed with Crapo’s assessment that the GSEs 'are systemically important companies [and] that they continue to be too big to fail.'"

"Yet when Sen. Mark Warner (D-Va.) pressed Mnuchin and Calabria on whether the Financial Stability Oversight Council, the uber regulator created after the crisis to spot emerging risks in the financial system, should subject Fannie and Freddie to greater oversight, they rejected the idea. 'It appears to me from your administrative proposals, we could end up with a system that actually doesn’t end too-big-to-fail and doesn’t increase affordable access to credit — that is a grave concern to me,' Warner said. The administration’s plan, he said, is 'going to put us right back to where we were prior to 2008.'"

"Mnuchin disputed Warner’s characterization, and he and Calabria emphasized that the White House plan includes reforms to reduce the risk in the companies’ portfolios. As it stands, underwriting standards at Fannie and Freddie have 'gotten worse, not better,' Calabria said, pointing to a 'massive expansion' of loans with high debt-to-income ratios in recent years."

"Efforts to reduce risk, though, would inevitably result in fewer people getting mortgages — a point Democrats on the committee made repeatedly. When Sen. Jack Reed (D-R.I.) pressed the officials to identify people who would not be able to get mortgages under the plan, Mnuchin said 'there may be certain people today who really shouldn’t get a mortgage because they can’t afford them.'"

From The Hill. "Sen. Sherrod Brown (Ohio), the Banking panel’s ranking Democrat, condemned the Trump plan as a 'cream-skimming privatization scheme.' Brown said the proposal failed to reflect basic areas of agreement among lawmakers and advocates. 'Rather than create a system that addresses the needs of working families, the Trump Administration has put out half-baked proposals that will make mortgages more expensive and harder to get,' Brown said."

"The Trump administration has given lawmakers an open-ended set of guidelines meant to reshape Fannie and Freddie into smaller firms with less leverage and control over the secondary housing finance market. 'We are the ones holding the bag at the end of the day after everybody else in the process has made money and walked away,' Calabria said. 'This is not a safe situation to be in.'"

The Wall Street Journal. "The Trump Administration last week sketched out an ambitious plan to rein in mortgage monsters Fannie Mae and Freddie Macand release them from government captivity. Godspeed to Federal Housing Finance Agency (FHFA) director Mark Calabria, who’s unlikely to get help from Congress in this Sisyphian task."

"The Godzillas, backed by the housing lobby and Wall Street speculators who have bought their shares, are eager to break loose and run wild again. While the Trump Administration has some useful ideas to cut them down to size, to avoid a repeat it’s first worth recalling how they became such monsters."

"Congress chartered the government-sponsored enterprises some five decades ago to increase liquidity in housing finance. The GSEs securitize and guarantee mortgages, freeing private lenders to make more loans. Thanks to an implicit government guarantee, they could borrow cheaply and push out competitors. Private profit and socialized risk—sweet."

"The duo also benefited from lower capital requirements that gave them an advantage over banks. Their mortgage-market share tripled to 25% in the 1980s, and then Democrats in Congress imposed 'affordable housing' mandates that encouraged the GSEs to bulk up even more. Fan and Fred increased subprime lending and relaxed underwriting standards, including 'liar loans' that required no income documentation. Their profits ballooned."

"But all of this set them up to collapse when the housing bubble burst, prompting Congress to establish the FHFA and bail them out. Uncle Sam took an 80% common stake in the GSEs. We argued at the time that they should be placed in receivership, but FHFA kept them on life support. Drip, drip."

"The Consumer Financial Protection Bureau exempted the GSEs from its 'qualified' mortgage rule requiring borrowers to have a 43% debt-to-income ratio. About 30% of the GSEs’ new purchase mortgage acquisitions last year exceeded this threshold and homeowners have put less than 5% down in about 10% of new purchase loans acquired by the GSEs."

"Fannie and Freddie have also competed with each other and the Federal Housing Administration (FHA) for subprime borrowers by easing underwriting standards. Obama-appointed FHFA directorMel Watt encouraged Fan and Fred to expand into riskier lines of businesses like cash-out refinancing and multi-family affordable housing. Taxpayers now stand behind $5 trillion in mortgages, while hedge funds have bought GSE shares on a bet they’ll eventually be unleashed."

"Mr. Calabria, who has substantial discretion as the new FHFA chief, could start by reducing GSE support for cash-out refinancing, investor oans, vacation home loans and higher principal-balance loans. The American Enterprise Institute’s Ed Pinto estimates that leaving these businesses over time could shrink the GSE footprint by 45%."

"The Administration also suggests levelling the regulatory field by subjecting Fannie and Freddie to comparable capital and underwriting standards that private lenders must meet. The Federal Reserve requires banks to hold more than twice as much capital for comparable loans than Mr. Watt proposed for Fannie and Freddie. Another idea is to form a nonaggression pact with the FHA to prevent a competitive erosion of lending standards."

"Mr. Calabria’s most urgent task is to make Fan and Fred less dangerous by shrinking them."